Economics for Dummies: Matt’s quite right, but there’s something else he doesn’t mention. When he or I make the decision to ride the train or burn coal for fun we consider the costs and benefits of those actions to ourselves only. We say, is this good or bad for me, given the costs of the activity and available alternatives? What we do NOT do is consider the social costs of our decision. When I get on the train, I spend no time at all thinking about how that decision might benefit drivers, who’ll have one less car on the road to deal with. And, for the most part, I spend no time at all thinking about how getting on the train affects my personal carbon footprint. Why should I? From my perspective, that tiny shift from driving to taking Metro has essentially no effect on CO2 concentrations and climate change.
But when no one considers social costs, these individual decisions add up to enormous problems. This is what economists call an externality, and it’s the basis for the entire national discussion of appropriate emissions policies. It’s a damn shame that our president and his enablers in the media have no freaking clue what it all means.
Americans can optimize their personal consumption decisions all day long, but without a policy in place to internalize social costs, they’ll still end up creating costly traffic jams and devastating climate change.